Mumbai: Non-banking financial companies (NBFCs) are seeing rising borrowing costs despite State Bank of India’s (SBI’s) liquidity support, company executives said, a development that could translate into higher lending rates for customers over the next six months.

“Our borrowing costs have gone up to 50 basis points. We expect part of the higher cost to be shared by customers and dealers," said Ramesh Iyer, vice-chairman and managing director, Mahindra & Mahindra Financial Services Ltd. The average cost for a one-year borrowing for an NBFC rated “AAA" is around 8.8%., according to Bloomberg News.

One basis point is one-hundredth of a percentage point.

Many NBFCs like Shriram Transport Finance Co. Ltd attribute the rise in borrowing cost to the recent change in mix of funding from mutual funds to banks.

“As the mutual fund outflows come to the banking system, borrowing costs for NBFCs have risen. Our incremental borrowing cost has gone up by 100 basis points," said Umesh Revankar, managing director of Shriram Transport. “That said, we have enough liquidity for the growth of existing business. However, we require additional liquidity for a 20-25% growth, which is not available," he said.

The liquidity crunch started after Infrastructure Leasing & Financial Services Ltd (IL&FS) defaulted on payments, prompting banks to freeze lending to NBFCs and housing finance companies. This caution worsened the liquidity situation of NBFCs. It got accentuated after DSP Mutual Fund sold a one-year ₹ 300-crore commercial paper issued by Dewan Housing Finance Corp. Ltd (DHFL) in the secondary market, at a discount of 11%. Further, a record ₹ 2.1 trillion flowed out of liquid and money market funds in September, shows data collated by the Association of Mutual Funds in India (Amfi).

In response to this liquidity crunch, SBI announced a liquidity support by announcing trebling of its portfolio purchase of loans from NBFCs to ₹ 45,000 crore this year.

The SBI move has met with mixed reaction from NBFCs. Some firms believe this will lead to NBFCs losing some of their best portfolio to banks and being left with bad assets. Other NBFC players feel there is need for stronger liquidity support from other banks.

“Recently, MFs faced huge redemptions in their liquid funds to the extent of around ₹ 2 trillion, and it is reported that the funds have moved to banks. This is a great opportunity for banks to use these funds to buy retail portfolios from NBFCs/HFCs to provide the much-needed liquidity at this point of time. Large and reputed NBFCs/HFCs will not have any ALM mismatch. However, they can use the portfolio sale proceeds to either pay off their CPs (commercial papers) or do further lending," said R. Sridhar, executive vice chairman and chief executive of IndoStar Capital.

Analysts believe selling good assets could have a negative impact on the NBFCs’ business growth and profitability.

“We anticipate substantial slowdown in AUM growth of NBFC in 2HFY19 along with increase in cost of funds. This may result into broad-based cutting down of their existing growth and profitability guidance," said Ashutosh Mishra, banking analyst at Reliance Securities Ltd.

Separately on 5 October, the Reserve Bank of India had warned of asset liability mismatches as NBFCs resort to increased market borrowings in the form of CPs for long-term funding such as infrastructure. The central bank assured that it will look at strengthening the ALM guidelines to avoid the roll-over risk going forward.